N-30D 1 pug.txt PUTNAM UTILITIES GROWTH AND INCOME FUND Putnam Utilities Growth and Income Fund ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 10-31-02 [GRAPHIC OMITTED: RULER] [SCALE LOGO OMITTED] FROM THE TRUSTEES [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III] Dear Fellow Shareholder: We wish this report to shareholders of Putnam Utilities Growth and Income Fund carried more positive results for the fiscal year ended October 31, 2002. However, it is of some comfort to note that despite negative returns on an absolute basis in the challenging stock market environment that continues to bedevil investors, on a relative basis, your fund outperformed its benchmark at net asset value and came in only slightly below the Lipper average for its peer group. You will find the details on page 10. This is also an appropriate time to counsel patience. History has shown again and again that long-term investors who persevere through good times and bad can benefit from bargains they obtained when markets were down. As equities continue their long, nerve-wracking struggle to get back on a positive track, investors should not abandon their long-term perspective. In any case, it is never easy to report investment losses. In the following report, the fund's management team discusses performance during the fiscal year just ended and offers its views of prospects for the fiscal year just begun. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds December 18, 2002 REPORT FROM FUND MANAGEMENT This fund is managed by the Putnam Utilities Team The confluence of several factors made the fiscal year ended October 31, 2002, a difficult period for utilities investors. Amid sputtering economic growth and a severe decline in the broader stock market, Putnam Utilities Growth and Income Fund was further challenged by problems that were unique to the utilities and communications sectors -- the two areas of the economy in which the fund's holdings are concentrated. Among other difficulties, discussed in greater detail below, both sectors are plagued by overcapacity, which severely limits pricing power, cutting into the profitability and, in some cases, the viability of many enterprises in these sectors. Despite being down sharply on an absolute basis, the fund outperformed its benchmark, the Standard & Poor's Utilities Index. The fund's results versus this stock-based benchmark benefited from its modest bond allocation. Bonds issued by utilities and telecom concerns also had a challenging year. Nevertheless, bond performance in these sectors vastly outpaced equity results, contributing to overall performance. The fund's bond exposure is also an important component of its dividend-paying strategy. However, because of significant declines in bond yields and the fund's increasing emphasis on securities selected for their total return potential, the fund's dividend was reduced during the period. Total return for 12 months ended 10/31/02 Class A Class B Class C Class M NAV POP NAV CDSC NAV CDSC NAV POP ----------------------------------------------------------------------- -27.73% -31.87% -28.35% -31.85% -28.37% -29.07% -28.16% -30.70% ----------------------------------------------------------------------- Past performance does not indicate future results. Performance information for longer periods and explanation of performance calculation methods begin on page 10. [GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Electric utilities 57.9% Telecommunications 20.6% Regional Bells 9.6% Natural gas utilities 5.9% Water utilities 1.8% Footnote reads: *Based on net assets as of 10/31/02. Holdings will vary over time. The fund's return was below the average for utilities funds tracked by Lipper for this period. This was primarily due to the management team's focus on stocks of integrated electric utilities companies with attractive valuations in a market that favored stocks of financially strong, regulated companies. We are optimistic that the problems that have troubled the utilities sector over the past two years are peaking and we believe our long-term valuation-based strategy should serve investors well over a full market cycle. Details about fund performance can be found on page 10. * STOCKS DECLINE BROADLY IN DIFFICULT MARKET At the start of the fiscal period, the capital markets were just beginning to recover from the aftermath of the September 11 tragedy. Stocks, which had plunged in value immediately after the attacks, were beginning to rise while high-quality bonds, which initially had soared in value in a flight to quality, were stabilizing. Economists, who generally had been concerned about the prospect for a recession, decided that the crisis made this prospect a certainty. At the same time, many of them also thought that the recovery from this recession would be more dramatic once it kicked in, given that the economy had been pushed to artificial lows. Therefore, when corporate earnings reports began to turn positive in November 2001, investors bid up stock prices significantly, anticipating that an economic recovery would materialize in the first half of 2002, bringing with it rising earnings. Simultaneously, expectations of increasing economic growth raised the specter of higher inflation and rising interest rates, causing bond yields to rise and cutting bond returns. Fund Profile Putnam Utilities Growth and Income Fund seeks capital growth and current income by investing in stocks and bonds of utilities, such as natural gas, electric, and communications services companies. It may be suitable for investors who want a long-term investment that can offer both income and growth potential. Through the first quarter of 2002, a stream of improving economic indicators sustained stock investors' hopes for improving earnings and bond investors' expectations for rising growth and the likelihood of higher interest rates. Then, spurred by accounting irregularities at several large U.S. companies, growing tensions in the Middle East and the Indian subcontinent, and lingering overvaluation from the last bull market, investor confidence in future economic growth seemed to crumble almost as abruptly as it had been restored. Stock prices fell significantly through the end of the third quarter while bond yields, which were already low, defied expectations and fell even further, pushing up bond prices. These trends reversed modestly in the final month of the fund's fiscal year, as investors determined that stock valuations were compelling, fueling an October rally. Bond yields rose modestly as investors responded to the prospect of higher inflation that sometimes accompanies renewed economic growth. In addition, bond investors believed that further interest-rate declines were unlikely, given the 40-year lows registered in September. * ELECTRIC UTILITIES INDUSTRY FACED MANY CHALLENGES Against this already difficult market backdrop, Putnam Utilities Growth and Income Fund was further challenged by problems in the electric utilities sector, which represents the fund's largest industry exposure. Electric utilities companies continued to suffer from excess capacity. Over the course of the past year, this drove down wholesale power prices even further than most analysts had expected, significantly impairing profits and driving down stock prices. The impact was more than we had anticipated, not only in the independent power producer and energy trading sectors, but also among integrated utilities companies with generating and trading subsidiaries -- an area of emphasis for the fund. The situation was further complicated by the fact that much of the over-investment was financed by debt, which stretched the balance sheets of many of the owners of this capacity. Partially in reaction to their misjudgments related to the California utilities and Enron, the ratings agencies have taken an unusually tough stance toward the industry, particularly toward the power generation and trading sectors. Companies with large amounts of debt were downgraded repeatedly and to levels below what they had expected. Many companies, which had fallen to below-investment-grade status or were in danger of doing so, faced a liquidity squeeze and were forced to sell securities (including equity) and assets at distressed prices, hurting existing shareholders and bondholders. "We intend to stick to our strategy of emphasizing integrated electric utilities because we believe this market segment offers the best risk/reward profile over the long term." -- Michael Yogg, Portfolio Leader Putnam Utilities Growth and Income Fund The problem was compounded by allegations that some managers, in response to financial pressures, had falsified trading records, pricing survey data, and financial results to mask serious problems. This undercut companies' ability to raise money. One portfolio holding, Reliant Energy, Inc. (now called CenterPoint Energy), for example, called back a bond issue after it was forced to admit that traders manufactured "wash trades" to boost reported revenues. Slowing momentum on deregulation was another challenge faced by companies that had viewed it as a growth-creating force. Spurred by the problems in California and at Enron, many state regulators stalled, and in a few cases reversed, movement toward deregulation. Stocks of companies that were well positioned to benefit from deregulation, such as Entergy, have been hurt by this reversal. All of these developments contributed to poor performance for the sector, which, over the course of the past fiscal year, was worse than that of the overall market. This experience has been particularly vexing for experienced investors in utilities because, historically, the utilities sector has outperformed in down markets. [GRAPHIC OMITTED: TOP 10 HOLDINGS] TOP 10 EQUITY HOLDINGS Duke Energy Corp. Electric utilities Vodafone Group PLC (United Kingdom) Telecommunications Verizon Communications, Inc. Regional Bells Entergy Corp. Electric utilities Exelon Corp. Electric utilities PG&E Corp. Electric utilities FPL Group, Inc. Electric utilities Dominion Resources, Inc. Electric utilities Edison International Electric utilities SBC Communications, Inc. Regional Bells Footnote reads: These holdings represent 36.8% of the fund's net assets as of 10/31/02. Portfolio holdings will vary over time. While the fund was certainly not immune from the broader decline registered in the utilities sector, it did benefit on a relative basis from avoiding or minimizing exposure to the most troubled traders and independent power producers, including high- profile names such as Enron Corporation, Calpine Corporation, and Williams Companies, Inc. These companies were most vulnerable to the market's preference for safe, regulated businesses. Although integrated or hybrid companies (those with both regulated and unregulated components) fared better than traders and independent power producers, their stock prices were hurt by their generation and/or trading subsidiaries. The fund's emphasis on integrated companies such as CenterPoint Energy, Duke Energy Corp., Edison International, and PG&E Corp., detracted from results even though the largest businesses of these holdings are regulated. * NEGATIVE SENTIMENT CREATES OPPORTUNITY IN UTILITIES GOING FORWARD The fund's management team is encouraged by opportunities currently available in the electric utilities sector -- the seeds of which may have been sown by the past year's disappointments. Sentiment in the sector is so negative that many stocks are selling at levels below the book value of the regulated utility assets. These assets historically have earned a regulated return of about 10% on equity, and the companies are entitled to recover all legitimate costs associated with these assets. We believe that this is a classic case of mis-valuation, caused by the rating agencies' overreaction and a genuine liquidity squeeze. It might not correct itself right away, but we believe it will do so over time. Already we have seen cases in which companies that were forced to issue stock to raise cash have emerged from their offering with a stronger-than-expected stock price. Dominion Resources, an integrated electric utility company owned by the fund, represented one such case. While we expect that capacity will continue to grow for another year, we believe that power prices may have now bottomed, because in many cases they barely cover cash costs. No matter how much capacity is available, it seems unlikely that electric utilities will indefinitely elect to burn $28 worth of gas to produce $27 worth of electricity. In almost all regions of the country, the marginal price of gas will tend to put a floor under the price of electricity. We plan to continue to hold large positions in the California utilities (Edison International and PG&E Corp.). Although their stocks have been hurt by problems at their independent power producer subsidiaries, we believe that regulated utility subsidiaries should recover and that the stocks of their parent companies are currently selling below the value of the utilities alone. Duke Energy remains a large holding, though not a large overweighting relative to the benchmark index. Their merchant generation and trading have been less profitable than expected. In addition, the company's trading in California, where some participants have admitted to manipulating the market, may yet prove embarrassing. Nevertheless, we believe that Duke Energy's strength across a broad array of businesses and its currently high dividend yield (at the time of printing, nearly 6%) make the stock an attractive holding. CenterPoint Energy is another attractive, undervalued stock in our opinion. It owns a regulated franchise that is stable operationally but, due to the mechanics of the spinoff of Reliant Resources, it has been caught short of equity and cash in the midst of a liquidity squeeze. Looking over the past year's results, it appears that a focus on financial strength and stable, regulated businesses might have served the fund better than its strategy of overweighting hybrid companies with both regulated and unregulated franchises. We favored stocks with attractive valuations while the market paid for safety. However, in our opinion, the market may have paid too much for safety. We intend to stick to our strategy, especially given our estimation that we have reached a bottom in the relative performance of the stocks we favor. Many of these companies, notably the two large California utilities, sell for less than the value of their regulated franchises alone -- others for only slightly more -- making them highly attractive to us from a valuation standpoint. * TELECOM STRATEGY REMAINS DEFENSIVE Ongoing troubles in the telecommunications sector, which continues to struggle to recover from global overcapacity and a corresponding lack of pricing power, also detracted from the fund's absolute results during the period. The management team's defensive global telecom strategy served the fund well during the challenging environment of the past fiscal year and we intend to maintain that strategy going forward. Our global telecom strategy is sensitive to the type of equipment (fixed line versus wireless) and to the regulatory environment in each country. Among fixed-line companies in the United States we favored BellSouth Corp. and Verizon Communications, Inc., two of the regional Bells that we think remain well positioned in the highly competitive long distance and local voice and data markets. They are characterized by expanding cash flows and secure dividends. Verizon has the added advantage of owning the largest and best-positioned wireless operation in the United States, Verizon Wireless, while we believe that BellSouth is the most ideally positioned from a regulatory standpoint. Korea Telecom Corp. (KT Corp.) and Telefonos de Mexico (Telmex) are among the integrated (fixed and wireless) companies in emerging markets that we believe offer the most attractive opportunities given their dominant market position and the highly favorable regulatory environment in each of these countries, which enables them to generate a high cash flow. Telecom Italia and Swisscom are two favorites among the fund's holdings in the European telecommunications industry. The fund also benefited from our strategy of emphasizing wireless market leaders with a strong cash flow and a demonstrated record of reinvesting in their business to maintain their leadership position. One of the tenets behind this strategy is our belief that consolidation is inevitable in an environment where the weaker players are not earning their cost of capital. Wireless substitution from fixed line also remains a global theme that we are closely monitoring. British-based Vodafone Group PLC, which is ranked either first or second in every market in which it competes, remains overweighted as this market leader continues to grow its cash flow. Likewise, the world's largest cellular telephone company, Japan-based NTT DoCoMo, remains a focus. In addition to the local strength of the Japanese wireless market, NTT DoCoMo is a global leader in data services. Our strategy of either avoiding or underweighting competitively disadvantaged U.S. wireless companies, such as Qwest Communications and WorldCom, benefited performance. * OUTLOOK FOR MODEST EQUITY RETURNS Our economists have reined in their forecasts for U.S. economic growth in 2003 but still do not foresee a "double-dip" recession. The 1/2% interest-rate cut by the Federal Reserve Board shortly after the end of the period should help to reduce borrowing costs for companies, which may help to ease the liquidity squeeze being felt by some of the companies in the fund's portfolio. We will adhere to our research-intensive, valuation-based investment discipline as we seek to identify securities in your fund's universe that are selling below their fair value, offer attractive dividend or coupon income, and fit the risk/reward profile of the fund's portfolio. We believe that the worst of the challenges for the utilities and telecommunications sectors are behind them. In the utilities sector, where we believe valuations are currently attractive, our analysis continues to see the long-term benefits of a focus on integrated electric utilities. In the telecommunications sector, we expect consolidation to remain a strong theme as the global marketplace works off excess capacity. Therefore, we will continue to seek out market leaders with strong cash flows, competitive market positions, and favorable regulatory environments. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 10/31/02 there is no guarantee the fund will continue to hold these securities in the future. The fund concentrates its investments in one region or in one sector and involves more risk than a fund that invests more broadly. The fund is managed by the Putnam Utilities Team. The members of the team are Michael Yogg (Portfolio Leader), Steven Balter (Portfolio Member), James Prusko (Portfolio Member), and William Landes. PUTNAM'S POLICY ON CONFIDENTIALITY In order to conduct business with our shareholders, we must obtain certain personal information such as account holders' addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds, and in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you've listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don't hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time. PERFORMANCE SUMMARY This section provides information about your fund's performance, which should always be considered in light of its investment strategy. TOTAL RETURN FOR PERIODS ENDED 10/31/02 Class A Class B Class C Class M (inception dates) (11/19/90) (4/27/92) (7/26/99) (3/1/95) NAV POP NAV CDSC NAV CDSC NAV POP ------------------------------------------------------------------------------ 1 year -27.73% -31.87% -28.35% -31.85% -28.37% -29.07% -28.16% -30.70% ------------------------------------------------------------------------------ 5 years -16.87 -21.63 -19.93 -21.00 -20.04 -20.04 -18.90 -21.72 Annual average -3.63 -4.76 -4.35 -4.60 -4.37 -4.37 -4.10 -4.78 ------------------------------------------------------------------------------ 10 years 55.57 46.68 44.29 44.29 44.11 44.11 48.22 43.02 Annual average 4.52 3.90 3.73 3.73 3.72 3.72 4.01 3.64 ------------------------------------------------------------------------------ Annual average (life of fund) 5.52 4.99 4.73 4.73 4.72 4.72 5.00 4.68 ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/02 Standard & Poor's Consumer Utilities Index price index ------------------------------------------------------------------------------ 1 year -36.36% 2.08% ------------------------------------------------------------------------------ 5 years -13.56 12.26 Annual average -2.87 2.34 ------------------------------------------------------------------------------ 10 years 34.23 27.95 Annual average 2.99 2.50 ------------------------------------------------------------------------------ Annual average (life of fund) 4.97 2.59 ------------------------------------------------------------------------------ Past performance does not indicate future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate and you may have a gain or a loss when you sell your shares. Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 5.75% and 3.50%, respectively. Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Performance for class B, C, and M shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and higher operating expenses for such shares. [GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT] GROWTH OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment since 10/31/92 Fund's class A Standard & Poor's Consumer price Date shares at POP Utilities Index index 10/31/92 9,425 10,000 10,000 10/31/93 11,352 12,135 10,275 10/31/94 10,523 10,180 10,543 10/31/95 12,702 12,741 10,839 10/31/96 14,807 14,216 11,164 10/31/97 17,643 15,528 11,396 10/31/98 21,358 19,722 11,559 10/31/99 23,385 20,036 11,855 10/31/00 25,498 27,222 12,264 10/31/01 20,297 21,093 12,525 10/31/02 $14,668 $13,423 $12,795 Footnote reads: Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund's class B and class C shares would have been valued at $14,429 and $14,411, respectively, and no contingent deferred sales charges would apply; a $10,000 investment in the fund's class M shares would have been valued at $14,822 ($14,302 at public offering price). PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 10/31/02 Class A Class B Class C Class M ------------------------------------------------------------------------------ Distributions (number) 4 4 4 4 ------------------------------------------------------------------------------ Income $0.2197 $0.1600 $0.1582 $0.1781 ------------------------------------------------------------------------------ Return of capital* 0.0233 0.0170 0.0168 0.0189 ------------------------------------------------------------------------------ Capital gains -- -- -- -- ------------------------------------------------------------------------------ Total $0.2430 $0.1770 $0.1750 $0.1970 ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV NAV POP ------------------------------------------------------------------------------ 10/31/01 $9.56 $10.14 $9.51 $9.51 $9.55 $9.90 ------------------------------------------------------------------------------ 10/31/02 6.71 7.12 6.67 6.67 6.70 6.94 ------------------------------------------------------------------------------ Current return (end of period) ------------------------------------------------------------------------------ Current dividend rate 1 3.28% 3.09% 2.46% 2.40% 2.75% 2.65% ------------------------------------------------------------------------------ Current 30-day SEC yield 2 3.98 3.75 3.26 3.28 3.50 3.38 ------------------------------------------------------------------------------ 1 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period. 2 Based only on investment income, calculated using SEC guidelines. * See page 35. TOTAL RETURN FOR PERIODS ENDED 9/30/02 (most recent calendar quarter) Class A Class B Class C Class M (inception dates) (11/19/90) (4/27/92) (7/26/99) (3/1/95) NAV POP NAV CDSC NAV CDSC NAV POP ------------------------------------------------------------------------------ 1 year -32.23% -36.13% -32.83% -36.12% -32.75% -33.41% -32.57% -34.95% ------------------------------------------------------------------------------ 5 years -19.84 -24.44 -22.93 -23.96 -22.86 -22.86 -21.87 -24.59 Annual average -4.33 -5.45 -5.08 -5.33 -5.06 -5.06 -4.82 -5.49 ------------------------------------------------------------------------------ 10 years 47.92 39.44 37.16 37.16 37.16 37.16 40.80 35.93 Annual average 3.99 3.38 3.21 3.21 3.21 3.21 3.48 3.12 ------------------------------------------------------------------------------ Annual average (life of fund) 5.23 4.71 4.44 4.44 4.44 4.44 4.72 4.40 ------------------------------------------------------------------------------ Past performance does not indicate future results. More recent returns may be more or less than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. See first page of performance section for performance calculation method. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the price, or value, of one share of a mutual fund, without a sales charge. NAVs fluctuate with market conditions. The NAV is calculated by dividing the net value of all the fund's assets by the number of outstanding shares. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 5.75% maximum sales charge for class A shares and 3.50% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B or C shares and assumes redemption at the end of the period. Your fund's class B CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. The CDSC for class C shares is 1% for one year after purchase. Class A shares are generally subject to an initial sales charge and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class B shares may be subject to a sales charge upon redemption. Class C shares are not subject to an initial sales charge and are subject to a contingent deferred sales charge only if the shares are redeemed during the first year. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). COMPARATIVE BENCHMARKS Standard & Poor's Utilities Index is an unmanaged index of common stock issued by utilities companies. Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index. Consumer price index (CPI) is a commonly used measure of inflation; it does not represent an investment return. Lipper Inc. is a third-party industry ranking entity that ranks funds (without sales charges) with similar current investment styles or objectives as determined by Lipper. A GUIDE TO THE FINANCIAL STATEMENTS These sections of the report, as well as the accompanying Notes, preceded by the Report of independent accountants, constitute the fund's financial statements. The fund's portfolio lists all the fund's investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification. Statement of assets and liabilities shows how the fund's net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the net assets allocated to remarketed preferred shares.) Statement of operations shows the fund's net investment gain or loss. This is done by first adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings -- as well as any unrealized gains or losses over the period -- is added to or subtracted from the net investment result to determine the fund's net gain or loss for the fiscal year. Statement of changes in net assets shows how the fund's net assets were affected by distributions to shareholders and by changes in the number of the fund's shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Financial highlights provide an overview of the fund's investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period. For open-end funds, a separate table is provided for each share class. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees and Shareholders of Putnam Utilities Growth and Income Fund In our opinion, the accompanying statement of assets and liabilities, including the fund's portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam Utilities Growth and Income Fund (the "fund") at October 31, 2002, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at October 31, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts December 9, 2002
THE FUND'S PORTFOLIO October 31, 2002 COMMON STOCKS (81.7%) (a) NUMBER OF SHARES VALUE Combined Utilities (0.5%) ------------------------------------------------------------------------------------------------------------------- 305,200 United Utilities $2,821,758 Communications Equipment (0.2%) ------------------------------------------------------------------------------------------------------------------- 61,200 BCE, Inc. (Canada) 1,055,577 Electric Utilities (47.8%) ------------------------------------------------------------------------------------------------------------------- 212,100 Allegheny Energy, Inc. 1,208,970 99,100 Alliant Energy Corp. 1,587,582 108,900 Ameren Corp. 4,399,560 376,600 American Electric Power Co., Inc. 9,656,024 1,055,821 Aquila, Inc. 3,906,538 1,334,400 CenterPoint Energy, Inc. 9,447,552 199,900 Consolidated Edison, Inc. 8,509,743 369,300 Dominion Resources, Inc. 17,726,400 152,589 DTE Energy Co. 6,880,238 1,316,000 Duke Energy Corp. 26,964,840 1,716,400 Edison International (NON) 17,249,820 14,100 Electrabel SA (Belgium) 3,276,508 908,924 Electricidade de Portugal SA (Portugal) 1,385,886 225,200 Energy East Corp. 4,796,760 553,700 Entergy Corp. 24,412,633 412,387 Exelon Corp. 20,784,305 413,500 FirstEnergy Corp. 13,418,075 337,500 FPL Group, Inc. 19,905,750 116,961 Iberdrola SA (Spain) 1,389,637 1,895,734 PG&E Corp. (NON) 20,568,714 127,200 Pinnacle West Capital Corp. 3,625,200 338,700 Progress Energy, Inc. 14,130,564 184,500 Public Power Corp. 144A (NON) 2,506,280 88,000 Public Service Enterprise Group, Inc. 2,521,200 1,635,500 Sierra Pacific Resources (NON) 9,780,290 442,300 Southern Co. (The) 13,136,310 96,200 Teco Energy, Inc. 1,423,760 418,600 TXU Corp. 6,006,910 849,630 XCEL Energy, Inc. 8,836,152 ------------- 279,442,201 Natural Gas Utilities (4.0%) ------------------------------------------------------------------------------------------------------------------- 793,973 El Paso Corp. 6,153,291 98,200 KeySpan Corp. 3,587,246 192,682 Kinder Morgan Management, LLC (NON) 5,728,422 148 Kinder Morgan, Inc. 5,418 289,052 NiSource, Inc. 4,775,139 54,500 Piedmont Natural Gas Co., Inc. 1,948,920 46,200 South Jersey Industries, Inc. 1,475,166 ------------- 23,673,602 Power Producers (0.3%) ------------------------------------------------------------------------------------------------------------------- 1,052,311 Reliant Resources, Inc. (NON) 1,978,345 Regional Bells (9.4%) ------------------------------------------------------------------------------------------------------------------- 545,000 BellSouth Corp. 14,251,750 614,791 SBC Communications, Inc. (SEG) 15,775,537 654,100 Verizon Communications, Inc. 24,698,816 ------------- 54,726,103 Telecommunications (18.2%) ------------------------------------------------------------------------------------------------------------------- 65,300 ALLTEL Corp. 3,246,063 28,300 America Movil SA de CV ADR Ser. L (Mexico) 380,352 820,000 AT&T Corp. 10,692,800 73,500 AT&T Wireless Services, Inc. (NON) 504,945 597,949 BT Group PLC (United Kingdom) (NON) 1,697,808 99,100 CenturyTel, Inc. 2,807,503 408,500 China Mobile, Ltd. (Hong Kong) (NON) 1,003,036 261,200 Citizens Communications Co. (NON) 2,173,184 474,400 Deutsche Telekom AG (Germany) 5,443,863 338 Japan Telecom Co., Ltd. (Japan) 888,602 95,580 KT Corp. (South Korea) 3,947,187 4,143 NTT DoCoMo, Inc. (Japan) 7,644,660 282,231 Orange SA (France) (NON) 1,584,407 860,295 Portugal Telecom SGPS SA ADR (Portugal) 4,998,314 27,350 SK Telecom Co., Ltd. (South Korea) 5,052,340 3,144 Swisscom AG (Switzerland) 935,296 105,556 TDC A/S (Denmark) 2,279,098 781,687 Telecom Corp. of New Zealand, Ltd. (New Zealand) 1,922,689 127,239 Telecom Corp. of New Zealand, Ltd. 144A (New Zealand) 312,965 1,085,050 Telecom Italia Mobile SpA (Italy) 5,049,248 942,500 Telecom Italia SpA (Italy) 7,484,017 877,084 Telefonica SA (Spain) (NON) 8,319,280 36,700 Telefonos de Mexico SA de CV (Telmex) ADR Class L (Mexico) 1,119,350 16,671,022 Vodafone Group PLC (United Kingdom) 26,797,351 ------------- 106,284,358 Water Utilities (1.3%) ------------------------------------------------------------------------------------------------------------------- 345,500 Philadelphia Suburban Corp. 7,424,795 ------------- Total Common Stocks (cost $600,391,140) $477,406,739 CORPORATE BONDS AND NOTES (17.4%) (a) PRINCIPAL AMOUNT VALUE Electric Utilities (10.1%) ------------------------------------------------------------------------------------------------------------------- $950,000 Alabama Power Co. notes 5 1/2s, 2017 $958,687 2,370,000 AmerenEnergy Generating Co. sr. notes Ser. C, 7 3/4s, 2005 2,603,024 3,000,000 Arizona Public Service Co. notes 6 1/4s, 2005 3,145,500 2,800,000 CMS Energy Corp. pass-through certificates 7s, 2005 2,030,000 1,055,000 CMS Panhandle Holding Corp. sr. notes 6 1/8s, 2004 997,059 1,500,000 Connecticut Light & Power Co. 1st mtge. Ser. D, 7 7/8s, 2024 1,645,500 950,000 Consolidated Edison Company of New York debs. Ser. B, 7.15s, 2009 1,080,644 2,340,000 Dominion Resources, Inc. sr. notes 8 1/8s, 2010 2,615,512 2,820,000 DPL, Inc. bonds 8 1/8s, 2031 2,828,869 2,975,000 Duquesne Light Co. 1st mtge. Ser. O, 6.7s, 2012 3,260,408 1,935,000 Exelon Corp. sr. notes 6 3/4s, 2011 2,068,612 2,370,000 FirstEnergy Corp. notes Ser. B, 6.45s, 2011 2,207,063 1,180,000 Florida Power & Light Co. 1st mtge. 6 7/8s, 2005 1,307,932 1,805,000 Kansas Gas & Electric debs. 8.29s, 2016 1,602,371 2,350,000 Mission Energy Holding Co. sec. notes 13 1/2s, 2008 587,500 2,830,000 New Century Energies, Inc. coll. trust 6 3/8s, 2005 2,795,672 2,450,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 2,821,763 1,880,000 Nisource Finance Corp. company guaranty 7 7/8s, 2010 1,854,000 270,000 Northern States Power Co. 144A 1st mtge. 8s, 2012 288,668 3,000,000 Northwestern Corp. notes 8 3/4s, 2012 2,250,000 1,610,000 Peco Energy Co. 1st mtge. 4 3/4s, 2012 1,577,533 605,000 Pepco Holdings, Inc. 144A notes 5 1/2s, 2007 611,607 2,750,000 PG&E Gas Transmission Northwest sr. notes 7.1s, 2005 2,117,500 1,600,000 Progress Energy, Inc. sr. notes 6.05s, 2007 1,625,088 935,000 PSI Energy, Inc. 1st mtge. Ser. EEE, 6.65s, 2006 984,844 3,500,000 Sierra Pacific Power Co. med. term notes Ser. C, 6.82s, 2006 3,122,245 2,725,000 Southern Investments Service Co. sr. notes 6.8s, 2006 (United Kingdom) 2,919,620 1,760,000 Tampa Electric Co. notes 6 7/8s, 2012 1,723,832 3,109,874 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 3,336,335 2,000,000 Western Resources, Inc. sr. notes 6 7/8s, 2004 1,824,980 ------------- 58,792,368 Natural Gas Utilities (1.9%) ------------------------------------------------------------------------------------------------------------------- 3,500,000 Columbia Energy Group notes Ser. E, 7.32s, 2010 3,377,920 640,000 KN Capital Trust III company guaranty 7.63s, 2028 614,041 600,000 Nisource Capital Markets, Inc. notes Ser. MTN, 7.69s, 2005 602,712 1,425,000 ONEOK, Inc. sr. notes 7 1/8s, 2011 1,524,764 990,000 Southern California Gas Co. 1st mtge. 4.8s, 2012 967,089 3,500,000 Southwest Gas Corp. debs. 7 1/2s, 2006 3,710,490 ------------- 10,797,016 Oil & Gas (1.1%) ------------------------------------------------------------------------------------------------------------------- 495,000 Canadian Natural Resources, Ltd. sr. notes 5.45s, 2012 (Canada) 502,930 110,000 Devon Financing Corp. ULC company guaranty 7 7/8s, 2031 126,268 380,000 Devon Financing Corp. ULC company guaranty 6 7/8s, 2011 421,675 2,500,000 Louis Dreyfus Natural Gas Corp. notes 6 7/8s, 2007 2,690,800 1,670,000 Midamerican Energy Holdings Co. 144A sr. notes 4 5/8s, 2007 1,653,589 90,000 Motiva Enterprises, LLC 144A sr. notes 5.2s, 2012 89,384 1,120,000 Union Oil Company of California company guaranty 5.05s, 2012 1,101,072 ------------- 6,585,718 Power Producers (0.3%) ------------------------------------------------------------------------------------------------------------------- 1,200,000 Calpine Corp. sr. notes 7 3/4s, 2009 384,000 445,000 Midland Funding II Corp. debs. Ser. A, 11 3/4s, 2005 449,450 1,246,921 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 1,137,865 ------------- 1,971,315 Regional Bells (0.2%) ------------------------------------------------------------------------------------------------------------------- 1,190,000 Verizon Global Funding Corp. notes 7 1/4s, 2010 1,279,119 Telecommunications (2.4%) ------------------------------------------------------------------------------------------------------------------- 150,000 AT&T Corp. sr. notes FRN 7.3s, 2011 146,970 2,340,000 AT&T Wireless Services, Inc. sr. notes 7 7/8s, 2011 2,024,100 1,575,000 British Telecommunications PLC notes 8 3/8s, 2010 (United Kingdom) 1,842,105 4,000,000 Century Telephone Enterprises, Inc. debs. Ser. G, 6 7/8s, 2028 3,751,920 1,755,000 Citizens Communications Co. notes 9 1/4s, 2011 1,825,200 270,000 Deutsche Telekom International Finance BV bonds 8s, 2010 (Netherlands) 300,585 1,550,000 Deutsche Telekom International Finance BV company guaranty FRN 8 3/4s, 2030 (Netherlands) 1,647,417 2,340,000 France Telecom notes 7 3/4s, 2011 (France) 2,557,666 ------------- 14,095,963 Telephone (0.9%) ------------------------------------------------------------------------------------------------------------------- 5,000,000 New England Telephone & Telegraph Co. debs. 7 7/8s, 2029 5,214,800 Water Utilities (0.5%) ------------------------------------------------------------------------------------------------------------------- 2,500,000 Pennsylvania-American Water Co. 144A mtge. 7.8s, 2026 2,744,475 ------------- Total Corporate Bonds and Notes (cost $105,667,371) $101,480,774 PREFERRED STOCKS (0.4%) (a) (cost $2,500,000) NUMBER OF SHARES VALUE ------------------------------------------------------------------------------------------------------------------- 2,500 Centaur Funding Corp. 144A Ser. B, 9.08% pfd. (Cayman Islands) $2,098,775 U.S. GOVERNMENT AND AGENCY MORTGAGE OBLIGATIONS (0.2%) (a) (cost $1,057,852) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $890,000 Federal National Mortgage Association Pass-Through Certificates 7 1/4s, January 15, 2010 $1,067,920 COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%) (a) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $96,760 Bear Stearns Commercial Mortgage Securitization Corp. Ser. 99-WF2, Class A1, 6.8s, 2008 $105,952 139,856 Chase Manhattan Bank-First Union National Ser. 99-1, Class A1, 7.134s, 2007 154,037 376,049 LB-UBS Commercial Mortgage Trust Ser. 00-C4, Class A1, 7.18s, 2009 420,402 ------------- Total Collateralized Mortgage Obligations (cost $676,265) $680,391 SHORT-TERM INVESTMENTS (2.6%) (a) (cost $15,332,553) PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------- $15,342,788 Short-term investments held as collateral for loaned securities with yields ranging from 1.72% to 1.99% and due dates ranging from November 1, 2002 to December 23, 2002 (d) $15,332,553 ------------------------------------------------------------------------------------------------------------------- Total Investments (cost $725,625,181) $598,067,152 ------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $584,344,752. (NON) Non-income-producing security. (SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts at October 31, 2002. (d) See footnote 1 to the financial statements. 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. ADR after the name of a foreign holding stands for American Depositary Receipts, representing ownership of foreign securities on deposit with a custodian bank. The rates shown on Floating Rate Notes (FRN) are the current interest rates at October 31, 2002, which are subject to change based on the terms of the security. ------------------------------------------------------------------------------ Forward Currency Contracts to Buy at October 31, 2002 (aggregate face value $11,809,780) Unrealized Aggregate Face Delivery Appreciation/ Market Value Value Date (Depreciation) ------------------------------------------------------------------------------ Australian Dollars $1,406,644 $1,400,462 12/18/02 $6,182 British Pounds 2,333,761 2,297,556 12/18/02 36,205 Euro 1,696,564 1,694,026 12/18/02 2,538 Hong Kong Dollar 2,343,727 2,344,343 12/18/02 (616) Japanese Yen 3,939,284 4,073,393 12/18/02 (134,109) ------------------------------------------------------------------------------ $(89,800) ------------------------------------------------------------------------------ Forward Currency Contracts to Sell at October 31, 2002 (aggregate face value $19,265,243) Unrealized Market Aggregate Face Delivery Appreciation/ Value Value Date (Depreciation) ------------------------------------------------------------------------------ Euro $9,958,051 $9,958,671 12/18/02 $620 Danish Krone 2,641,729 2,643,634 12/18/02 1,905 British Pounds 3,435,122 3,416,072 12/18/02 (19,050) Mexican Peso 1,672,479 1,676,446 12/18/02 3,967 New Zealand Dollar 1,629,634 1,570,420 12/18/02 (59,214) ------------------------------------------------------------------------------ $(71,772) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Futures Contracts Outstanding at October 31, 2002 Unrealized Aggregate Face Expiration Appreciation/ Market Value Value Date (Depreciation) ------------------------------------------------------------------------------ U.S. Treasury Note 5 yr (Short) $1,478,547 $1,477,679 Dec-02 $(868) U.S. Treasury Note 10 yr (Short) 2,867,969 2,875,675 Dec-02 7,706 ------------------------------------------------------------------------------ $6,838 ------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES October 31, 2002 Assets ------------------------------------------------------------------------------------------- Investments in securities, at value, including $14,995,266 of securities on loan (identified cost $725,625,181) (Note 1) $598,067,152 ------------------------------------------------------------------------------------------- Cash 153,570 ------------------------------------------------------------------------------------------- Dividends, interest and other receivables 3,622,522 ------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 241,426 ------------------------------------------------------------------------------------------- Receivable for securities sold 816,982 ------------------------------------------------------------------------------------------- Receivable for open forward currency contracts (Note 1) 51,417 ------------------------------------------------------------------------------------------- Receivable for closed forward currency contracts (Note 1) 6,720 ------------------------------------------------------------------------------------------- Total assets 602,959,789 Liabilities ------------------------------------------------------------------------------------------- Payable for variation margin (Note 1) 14,781 ------------------------------------------------------------------------------------------- Payable for securities purchased 281,312 ------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 1,254,747 ------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 1,054,766 ------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 102,190 ------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 117,080 ------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,380 ------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 189,786 ------------------------------------------------------------------------------------------- Payable for open forward currency contracts (Note 1) 212,989 ------------------------------------------------------------------------------------------- Collateral on securities loaned, at value (Note 1) 15,332,553 ------------------------------------------------------------------------------------------- Other accrued expenses 53,453 ------------------------------------------------------------------------------------------- Total liabilities 18,615,037 ------------------------------------------------------------------------------------------- Net assets $584,344,752 Represented by ------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $881,123,833 ------------------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 122,988 ------------------------------------------------------------------------------------------- Accumulated net realized loss on investments and foreign currency transactions (Note 1) (169,202,784) ------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and assets and liabilities in foreign currencies (127,699,285) ------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $584,344,752 Computation of net asset value and offering price ------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($469,497,192 divided by 70,021,069 shares) $6.71 ------------------------------------------------------------------------------------------- Offering price per class A share (100/94.25 of $6.71)* $7.12 ------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($107,157,836 divided by 16,072,019 shares)** $6.67 ------------------------------------------------------------------------------------------- Net asset value and offering price per class C share ($3,331,571 divided by 499,264 shares)** $6.67 ------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($4,358,153 divided by 650,882 shares) $6.70 ------------------------------------------------------------------------------------------- Offering price per class M share (100/96.50 of $6.70)* $6.94 ------------------------------------------------------------------------------------------- * On single retail sales of less than $50,000. On Sales of $50,000 or more and on group sales, the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS Year ended October 31, 2002 Investment income: ------------------------------------------------------------------------------------------- Dividends (net of foreign tax of $259,609) $23,751,422 ------------------------------------------------------------------------------------------- Interest 8,365,938 ------------------------------------------------------------------------------------------- Securities lending 138,244 ------------------------------------------------------------------------------------------- Total investment income 32,255,604 Expenses: ------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 5,649,355 ------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 1,212,485 ------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 41,807 ------------------------------------------------------------------------------------------- Administrative services (Note 2) 15,649 ------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 1,711,344 ------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 1,645,686 ------------------------------------------------------------------------------------------- Distribution fees -- Class C (Note 2) 48,918 ------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 49,160 ------------------------------------------------------------------------------------------- Other 571,022 ------------------------------------------------------------------------------------------- Total expenses 10,945,426 ------------------------------------------------------------------------------------------- Expense reduction (Note 2) (286,983) ------------------------------------------------------------------------------------------- Net expenses 10,658,443 ------------------------------------------------------------------------------------------- Net investment income 21,597,161 ------------------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (164,832,215) ------------------------------------------------------------------------------------------- Net realized gain on futures contracts (Note 1) 236,935 ------------------------------------------------------------------------------------------- Net realized loss on foreign currency transactions (Note 1) (220,765) ------------------------------------------------------------------------------------------- Net unrealized depreciation of assets and liabilities in foreign currencies during the year (171,478) ------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and futures contracts during the year (121,476,197) ------------------------------------------------------------------------------------------- Net loss on investments (286,463,720) ------------------------------------------------------------------------------------------- Net decrease in net assets resulting from operations $(264,866,559) ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS Year ended October 31 ---------------------------------------- 2002 2001 ------------------------------------------------------------------------------------------------------- Decrease in net assets ------------------------------------------------------------------------------------------------------- Operations: ------------------------------------------------------------------------------------------------------- Net investment income $21,597,161 $26,376,063 ------------------------------------------------------------------------------------------------------- Net realized loss on investments and foreign currency transactions (164,816,045) (2,817,083) ------------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and assets and liabilities in foreign currencies (121,647,675) (312,751,850) ------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from operations (264,866,559) (289,192,870) ------------------------------------------------------------------------------------------------------- Distributions to shareholders: (Note 1) ------------------------------------------------------------------------------------------------------- From net investment income Class A (17,845,811) (21,639,632) ------------------------------------------------------------------------------------------------------- Class B (3,176,354) (4,332,241) ------------------------------------------------------------------------------------------------------- Class C (92,301) (89,767) ------------------------------------------------------------------------------------------------------- Class M (138,941) (197,147) ------------------------------------------------------------------------------------------------------- From net realized long-term gain on investments Class A -- (124,651,081) ------------------------------------------------------------------------------------------------------- Class B -- (37,476,212) ------------------------------------------------------------------------------------------------------- Class C -- (624,695) ------------------------------------------------------------------------------------------------------- Class M -- (1,473,880) ------------------------------------------------------------------------------------------------------- From return of capital Class A (1,896,919) (3,768,411) ------------------------------------------------------------------------------------------------------- Class B (337,630) (754,434) ------------------------------------------------------------------------------------------------------- Class C (9,811) (15,632) ------------------------------------------------------------------------------------------------------- Class M (14,769) (34,332) ------------------------------------------------------------------------------------------------------- Increase (decrease) from capital share transactions (Note 4) (201,791,213) 76,862,461 ------------------------------------------------------------------------------------------------------- Total decrease in net assets (490,170,308) (407,387,873) Net assets ------------------------------------------------------------------------------------------------------- Beginning of year 1,074,515,060 1,481,902,933 ------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $122,988 and $17,263, respectively) $584,344,752 $1,074,515,060 ------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS A ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended October 31 ----------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $9.56 $13.86 $14.06 $13.62 $12.49 ----------------------------------------------------------------------------------------------------- Investment operations: ----------------------------------------------------------------------------------------------------- Net investment income (a) .23 .25 .36 .39 .37 ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (2.84) (2.73) .75 .87 2.14 ----------------------------------------------------------------------------------------------------- Total from investment operations (2.61) (2.48) 1.11 1.26 2.51 ----------------------------------------------------------------------------------------------------- Less distributions: ----------------------------------------------------------------------------------------------------- From net investment income (.22) (.25) (.38) (.39) (.38) ----------------------------------------------------------------------------------------------------- From net realized gain on investments -- (1.53) (.93) (.43) (1.00) ----------------------------------------------------------------------------------------------------- From return of capital (.02) (.04) -- -- -- ----------------------------------------------------------------------------------------------------- Total distributions (.24) (1.82) (1.31) (.82) (1.38) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $6.71 $9.56 $13.86 $14.06 $13.62 ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) (27.73) (20.40) 9.04 9.49 21.06 ----------------------------------------------------------------------------------------------------- Ratios and supplemental data ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $469,497 $846,231 $1,128,437 $1,000,789 $825,884 ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.12 1.05 1.01 1.00 1.05 ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 2.68 2.14 2.78 2.80 2.87 ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 44.93 91.91 29.42 17.58 23.64 ----------------------------------------------------------------------------------------------------- (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS B ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended October 31 ----------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $9.51 $13.78 $13.98 $13.54 $12.42 ----------------------------------------------------------------------------------------------------- Investment operations: ----------------------------------------------------------------------------------------------------- Net investment income (a) .16 .16 .26 .28 .28 ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (2.82) (2.70) .74 .87 2.12 ----------------------------------------------------------------------------------------------------- Total from investment operations (2.66) (2.54) 1.00 1.15 2.40 ----------------------------------------------------------------------------------------------------- Less distributions: ----------------------------------------------------------------------------------------------------- From net investment income (.16) (.17) (.27) (.28) (.28) ----------------------------------------------------------------------------------------------------- From net realized gain on investments -- (1.53) (.93) (.43) (1.00) ----------------------------------------------------------------------------------------------------- From return of capital (.02) (.03) -- -- -- ----------------------------------------------------------------------------------------------------- Total distributions (.18) (1.73) (1.20) (.71) (1.28) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $6.67 $9.51 $13.78 $13.98 $13.54 ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) (28.35) (20.93) 8.19 8.69 20.19 ----------------------------------------------------------------------------------------------------- Ratios and supplemental data ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $107,158 $213,564 $335,411 $566,426 $706,220 ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.87 1.80 1.76 1.75 1.80 ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.92 1.39 2.06 2.06 2.13 ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 44.93 91.91 29.42 17.58 23.64 ----------------------------------------------------------------------------------------------------- (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS C ---------------------------------------------------------------------------------------- For the period Per-share July 26, 1999+ operating performance Year ended October 31 to October 31 ---------------------------------------------------------------------------------------- 2002 2001 2000 1999 ---------------------------------------------------------------------------------------- Net asset value, beginning of period $9.51 $13.79 $14.04 $14.34 ---------------------------------------------------------------------------------------- Investment operations: ---------------------------------------------------------------------------------------- Net investment income (a) .16 .16 .25 .07 ---------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (2.82) (2.70) .74 (.26) ---------------------------------------------------------------------------------------- Total from investment operations (2.66) (2.54) .99 (.19) ---------------------------------------------------------------------------------------- Less distributions: ---------------------------------------------------------------------------------------- From net investment income (.16) (.18) (.31) (.11) ---------------------------------------------------------------------------------------- From net realized gain on investments -- (1.53) (.93) -- ---------------------------------------------------------------------------------------- From return of capital (.02) (.03) -- -- ---------------------------------------------------------------------------------------- Total distributions (.18) (1.74) (1.24) (.11) ---------------------------------------------------------------------------------------- Net asset value, end of period $6.67 $9.51 $13.79 $14.04 ---------------------------------------------------------------------------------------- Total return at net asset value (%)(b) (28.37) (20.93) 8.12 (1.33)* ---------------------------------------------------------------------------------------- Ratios and supplemental data ---------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $3,332 $6,028 $4,734 $486 ---------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.87 1.80 1.76 .47* ---------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.93 1.38 1.94 .53* ---------------------------------------------------------------------------------------- Portfolio turnover (%) 44.93 91.91 29.42 17.58 ---------------------------------------------------------------------------------------- + Commencement of operations. * Not annualized. (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS M ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended October 31 ----------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $9.55 $13.83 $14.03 $13.60 $12.47 ----------------------------------------------------------------------------------------------------- Investment operations: ----------------------------------------------------------------------------------------------------- Net investment income (a) .18 .19 .29 .32 .32 ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (2.83) (2.71) .75 .86 2.13 ----------------------------------------------------------------------------------------------------- Total from investment operations (2.65) (2.52) 1.04 1.18 2.45 ----------------------------------------------------------------------------------------------------- Less distributions: ----------------------------------------------------------------------------------------------------- From net investment income (.18) (.20) (.31) (.32) (.32) ----------------------------------------------------------------------------------------------------- From net realized gain on investments -- (1.53) (.93) (.43) (1.00) ----------------------------------------------------------------------------------------------------- From return of capital (.02) (.03) -- -- -- ----------------------------------------------------------------------------------------------------- Total distributions (.20) (1.76) (1.24) (.75) (1.32) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $6.70 $9.55 $13.83 $14.03 $13.60 ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) (28.16) (20.72) 8.49 8.87 20.54 ----------------------------------------------------------------------------------------------------- Ratios and supplemental data ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $4,358 $8,692 $13,320 $14,045 $13,828 ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.62 1.55 1.51 1.50 1.55 ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 2.17 1.64 2.28 2.30 2.40 ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 44.93 91.91 29.42 17.58 23.64 ----------------------------------------------------------------------------------------------------- (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS October 31, 2002 Note 1 Significant accounting policies Putnam Utilities Growth and Income Fund (the "fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks capital growth and current income primarily through investments in equity and debt securities issued by public utility companies. The fund offers class A, class B, class C, and class M shares. Class A shares are sold with a maximum front-end sales charge of 5.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge but pay a higher ongoing distribution fee than class A shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class C shares are subject to the same fees and expenses as class B shares, except that class C shares have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class M shares are sold with a maximum front end sales charge of 3.50% and pay an ongoing distribution fee that is higher than class A shares but lower than class B and class C shares. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are stated at market value, which is determined using the last reported sales price on its principal exchange, or if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. For foreign investments, if trading or events occurring in other markets after the close of the principal exchange in which the securities are traded are expected to materially affect the value of the investments, then those investments are valued, taking into consideration these events, at their fair value following procedures approved by the Trustees. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value. Other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for certain debt obligations; such investments are stated at fair value on the basis of valuations furnished by an independent pricing service or dealers, approved by the Trustees, which determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and variable relationships, generally recognized by institutional traders, between securities. B) Joint trading account The fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, LLC ("Putnam Management"), the fund's manager, an indirect wholly-owned subsidiary of Putnam, LLC. These balances may be invested in issuers of high-grade short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the fund and the counterparty. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. E) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, and other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when accrued or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments. F) Forward currency contracts The fund may engage in forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short-term investments). The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is "marked to market" daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. G) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as "variation margin." Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. H) Security lending The fund may lend securities, through its agent Citibank N.A., to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by Citibank N.A., the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the Statement of operations. At October 31, 2002, the value of securities loaned amounted to $14,995,266. The fund received cash collateral of $15,332,553 which is pooled with collateral of other Putnam funds into 27 issuers of high-grade short-term investments. I) Line of credit The fund has entered into a committed line of credit with certain banks. This line of credit agreement includes restrictions that the fund maintains an asset coverage ratio of at least 300% and borrowings must not exceed prospectus limitations. For the year ended October 31, 2002, the fund had no borrowings against the line of credit. J) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At October 31, 2002, the fund had a capital loss carryover of approximately $166,677,000 available to the extent allowed by tax law to offset future net capital gain, if any, which will expire on October 31, 2010. K) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of losses on wash sale transactions, foreign currency gains and losses, and realized and unrealized gains and losses on certain futures contracts. Prior year distributions in the Statement of changes in net assets have been reclassified to conform with current year presentation. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended October 31, 2002, the fund reclassified $238,029 to decrease undistributed net investment income with a decrease to accumulated net realized losses of $238,029. The tax basis components of distributable earnings and the federal tax cost as of period end was as follows: Unrealized appreciation $38,084,491 Unrealized depreciation (168,161,799) ------------------ Net unrealized depreciation (130,077,308) Undistributed ordinary income -- Undistributed Gain -- Capital Loss Carryforward (166,676,666) Post October Loss -- ------------------ Cost for federal income tax purposes $728,144,460 Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.70% of the first $500 million of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of the next $5 billion and 0.43% thereafter. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam, LLC. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's expenses. The fund also reduced expenses through brokerage service arrangements. For the year ended October 31, 2002, the fund's expenses were reduced by $286,983 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $1,230 has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as a Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of Trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B, class C and class M shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for services provided and expenses incurred by it in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Retail Management at an annual rate up to 0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to class A, class B, class C and class M shares, respectively. The Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%, 1.00% and 0.75% of the average net assets attributable to class A, class B, class C and class M shares, respectively. For the year ended October 31, 2002, Putnam Retail Management, acting as underwriter received net commissions of $66,282 and $605 from the sale of class A and class M shares, respectively, and received $518,519 and $1,500 in contingent deferred sales charges from redemptions of class B and class C shares, respectively. A deferred sales charge of up to 1.00% and 0.65% is assessed on certain redemptions of class A and class M shares, respectively. For the year ended October 31, 2002, Putnam Retail Management, acting as underwriter received $2,610 and no monies on class A and class M redemptions, respectively. Note 3 Purchases and sales of securities During the year ended October 31, 2002, cost of purchases and proceeds from sales of investment securities other than U.S. government obligations and short-term investments aggregated $381,184,760 and $560,464,617, respectively. Purchases and sales of U.S. government obligations aggregated $1,510,608 and $1,522,319, respectively. Note 4 Capital shares At October 31, 2002, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended October 31, 2002 --------------------------------------------------------------------------- Class A Shares Amount --------------------------------------------------------------------------- Shares sold 6,179,092 $52,428,681 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 1,539,397 13,837,250 --------------------------------------------------------------------------- 7,718,489 66,265,931 Shares repurchased (26,174,107) (213,238,251) --------------------------------------------------------------------------- Net decrease (18,455,618) $(146,972,320) --------------------------------------------------------------------------- Year ended October 31, 2001 --------------------------------------------------------------------------- Class A Shares Amount --------------------------------------------------------------------------- Shares sold 13,094,531 $153,060,376 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 11,308,609 136,602,279 --------------------------------------------------------------------------- 24,403,140 289,662,655 Shares repurchased (17,367,765) (199,680,508) --------------------------------------------------------------------------- Net increase 7,035,375 $89,982,147 --------------------------------------------------------------------------- Year ended October 31, 2002 --------------------------------------------------------------------------- Class B Shares Amount --------------------------------------------------------------------------- Shares sold 2,820,415 $24,052,687 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 274,368 2,460,936 --------------------------------------------------------------------------- 3,094,783 26,513,623 Shares repurchased (9,481,614) (78,122,877) --------------------------------------------------------------------------- Net decrease (6,386,831) $(51,609,254) --------------------------------------------------------------------------- Year ended October 31, 2001 --------------------------------------------------------------------------- Class B Shares Amount --------------------------------------------------------------------------- Shares sold 6,617,021 $78,894,401 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 3,113,417 37,513,748 --------------------------------------------------------------------------- 9,730,438 116,408,149 Shares repurchased (11,617,074) 132,655,912 --------------------------------------------------------------------------- Net decrease (1,886,636) $(16,247,763) --------------------------------------------------------------------------- Year ended October 31, 2002 --------------------------------------------------------------------------- Class C Shares Amount --------------------------------------------------------------------------- Shares sold 273,199 $2,377,216 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 7,784 69,849 --------------------------------------------------------------------------- 280,983 2,447,065 Shares repurchased (415,409) (3,499,593) --------------------------------------------------------------------------- Net decrease (134,426) $(1,052,528) --------------------------------------------------------------------------- Year ended October 31, 2001 --------------------------------------------------------------------------- Class C Shares Amount --------------------------------------------------------------------------- Shares sold 472,992 $5,613,797 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 49,865 598,797 --------------------------------------------------------------------------- 522,857 6,212,594 Shares repurchased (232,436) (2,673,539) --------------------------------------------------------------------------- Net increase 290,421 $3,539,055 --------------------------------------------------------------------------- Year ended October 31, 2002 --------------------------------------------------------------------------- Class M Shares Amount --------------------------------------------------------------------------- Shares sold 95,720 $782,640 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 12,297 110,075 --------------------------------------------------------------------------- 108,017 892,715 Shares repurchased (367,706) (3,049,826) --------------------------------------------------------------------------- Net decrease (259,689) $(2,157,111) --------------------------------------------------------------------------- Year ended October 31, 2001 --------------------------------------------------------------------------- Class M Shares Amount --------------------------------------------------------------------------- Shares sold 208,596 $2,540,416 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 129,908 1,568,797 --------------------------------------------------------------------------- 338,504 4,109,213 Shares repurchased (391,169) (4,520,191) --------------------------------------------------------------------------- Net decrease (52,665) $(410,978) --------------------------------------------------------------------------- FEDERAL TAX INFORMATION (Unaudited) The fund has designated 100% of the distributions from net investment income as qualifying for the dividends received deduction for corporations. The return of capital is partly due to foreign currency losses. The Form 1099 you receive in January 2003 will show the tax status of all distributions paid to your account in calendar 2002.
TRUSTEES Name, Address, 1 Date of Birth, Position(s) Held with Fund and Length of Service Principal Occupation(s) as a Putnam Fund Trustee 2 During Past 5 Years Other Directorships Held by Trustee ------------------------------------------------------------------------------------------------------- Jameson A. Baxter (9/6/43), President, Baxter Director of ASHTA Chemicals, Inc., Trustee since 1994 Associates, Inc. Banta Corporation (a printing and (a management digital imaging firm), Intermatic consulting and private Corporation (manufacturer of energy investments firm) control products), Ryerson Tull, Inc. (a steel service corporation), Advocate Health Care, and the National Center for Nonprofit Boards. Chairman Emeritus of the Board of Trustees, Mount Holyoke College. Also held various positions in investment banking and corporate finance, including Vice President and principal of the Regency Group and consultant to First Boston Corp. Charles B. Curtis (4/27/40), President and Chief Member of the Council on Foreign Trustee since 2001 Operating Officer, Relations, the Electric Power Nuclear Threat Research Institute Advisory Council, Initiative (a private the Board of Directors of the Gas foundation dedicated Technology Institute, the University to reducing the threat of Chicago Board of Governors for of weapons of mass Argonne National Laboratory, the destruction), also serves Board of Directors of the as Senior Advisor to the Environment and Natural Resources United Nations Program Steering Committee, Foundation John F. Kennedy School of Government, Harvard University. Prior to 2002, Mr. Curtis was a member of the Board of Directors of the Gas Technology Institute. Until 2001, Mr. Curtis was a Member of the Department of Defense's Policy Board and Director of EG&G Technical Services, Inc. (fossil energy research and development support) and prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. John A. Hill (1/31/42), Vice-Chairman and Director of Devon Energy Trustee since 1985 and Managing Director, Corporation (formerly known as Chairman since 2000 First Reserve Snyder Oil Corporation), Corporation TransMontaigne Oil Company, (a registered investment Continuum Health Partners of advisor investing in New York, Sarah Lawrence College, companies in the and various private companies owned world-wide energy by First Reserve Corporation. industry on behalf of Trustee of TH Lee, Putnam institutional investors) Investment Trust (a closed-end investment company). Prior to acquiring First Reserve in 1983, Mr. Hill held executive positions with several advisory firms and various positions with the federal government, including Associate Director of the Office of Manage ment and Budget and Deputy Director of the Federal Energy Administration. Ronald J. Jackson Private investor Former Chairman, President, and (12/17/43), Chief Executive Officer of Fisher- Trustee since 1996 Price, Inc. (a toy manufacturer). Previously served as President and Chief Executive Officer of Stride- Rite, Inc. and Kenner Parker Toys. Also held financial and marketing positions with General Mills, Parker Brothers, and Talbots. President of the Kathleen and Ronald J. Jackson Foundation (charitable trust). Member of the Board of Overseers of WGBH (public television and radio). Member of the Board of Overseers of the Peabody Essex Museum. Paul L. Joskow (6/30/47), Elizabeth and James Director, National Grid Group Trustee since 1997 Killian Professor of (a UK-based holding company Economics and with interests in electric power, Management and natural gas distribution, and Director of the Center telecommunications networks), and for Energy and the Whitehead Institute for Environmental Policy Biomedical Research (a non-profit Research, Massachusetts research institution). President of the Institute of Technology Yale University Council. Prior to February 2002, March 2000, and September 1998, Dr. Joskow was a Director of State Farm Indemnity Company (an automobile insurance company), Director of New England Electric System (a public utility holding company) and a consultant to National Economic Research Associates, respectively. Elizabeth T. Kennan Chairman, Cambus- Director, Northeast Utilities, and (2/25/38), Kenneth Bloodstock (a Talbots (a distributor of women's Trustee since 1992 limited liability company apparel). Trustee of Centre College. involved in thoroughbred Prior to 2001, Dr. Kennan was a horse breeding and member of the Oversight Committee farming), President of Folger Shakespeare Library. Emeritus of Mount Prior to September 2000, June 2000, Holyoke College and November 1999, Dr. Kennan was a Director of Chastain Real Estate, Bell Atlantic, and Kentucky Home Life Insurance, respectively. Prior to 1995, Dr. Kennan was a Trustee of Notre Dame University. For 12 years, she was on the faculty of Catholic University. John H. Mullin, III Chairman and CEO Director Alex. Brown Realty, Inc., (6/15/41), of Ridgeway Farm Sonoco Products, Inc. (a packaging Trustee since 1997 (a limited liability company), The Liberty Corporation company engaged in (a company engaged in the timber and farming) broadcasting industry), and Progress Energy, Inc. (a utility company, formerly known as Carolina Power & Light). Trustee Emeritus of Washington & Lee University. Prior to October 1997, January 1998, and May 2001, Mr. Mullin was a Director of Dillon, Read and Co. Inc., The Ryland Group, Inc., and Graphic Packaging International Corp., respectively. Robert E. Patterson Senior Partner of Cabot Chairman of the Joslin Diabetes (3/15/45), Properties, LLP and Center, Trustee of SEA Education Trustee since 1984 Chairman of Cabot Association, and Director of Properties, Inc. Brandywine Trust Company (a trust company). Prior to February 1998, Mr. Patterson was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership. Prior to December 2001, Mr. Patterson was President and Trustee of Cabot Industrial Trust (publicly traded real estate investment trust). Prior to 1990, Mr. Patterson was Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, the predecessor of Cabot Partners, and prior to that was Senior Vice President of the Beal Companies. W. Thomas Stephens Corporate Director Director of Qwest Communications (9/2/42), (communications company), Xcel Trustee since 1997 Energy Incorporated (public utility company), TransCanada Pipelines, Norske Canada, Inc. (paper manufacturer) and Mail-Well (printing and envelope company). Prior to July 2001 and October 1999, Mr. Stephens was Chairman of Mail- Well and MacMillan-Bloedel (forest products company). Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville. W. Nicholas Thorndike Director of various Trustee of Northeastern University and (3/28/33), corporations and Honorary Trustee of Massachusetts Trustee since 1992 charitable General Hospital. Prior to organizations, September 2000, April 2000, and including Courier December 2001, Mr. Thorndike was Corporation (a book a Director of Bradley Real Estate, manufacturer) and Inc., a Trustee of Eastern Utilities Providence Journal Co. Associates, and a Trustee of Cabot (a newspaper publisher) Industrial Trust, respectively. Previously served as Chairman of the Board and managing partner of Wellington Management/Thorndike Doran Paine & Lewis, and Chairman and Director of Ivest Fund. Lawrence J. Lasser* President and Chief Director of Marsh & McLennan (11/1/42), Executive Officer of Companies, Inc. and the United Way Trustee since 1992 Putnam Investments of Massachusetts Bay. Member of the Vice President since 1981 and Putnam Board of Governors of the Investment Management Company Institute, Trustee of the Museum of Fine Arts, Boston, a Trustee and Member of the Finance and Executive Committees of Beth Israel Deaconess Medical Center, Boston, and a Member of the CareGroup Board of Managers Investment Committee, the Council on Foreign Relations, and the Commercial Club of Boston. George Putnam, III* President, New Director of The Boston Family (8/10/51), Generation Research, Office, L.L.C. (registered investment Trustee since 1984 and Inc. (a publisher of advisor), Trustee of the SEA President since 2000 financial advisory and Education Association, Trustee of other research services St. Mark's School, and Trustee of relating to bankrupt and Shore Country Day School. distressed companies) Previously, Mr. Putnam was an and New Generation attorney with the firm of Dechert Advisers, Inc. Price & Rhoads. (a registered investment adviser) A.J.C. Smith* (4/13/34), Director of Marsh & Director of Trident Corp. (a limited Trustee since 1986 McLennan partnership with over 30 institutional Companies, Inc. investors). Trustee of the Carnegie Hall Society, the Educational Broadcasting Corporation and the National Museums of Scotland. Chairman of the Central Park Conservancy. Member of the Board of Overseers of the Joan and Sanford I. Weill Graduate School of Medical Sciences of Cornell University. Fellow of the Faculty of Actuaries in Edinburgh, the Canadian Institute of Actuaries, and the Conference of Actuaries. Associate of the Society of Actuaries. Member of the American Actuaries, the International Actuarial Association and the International Association of Consulting Actuaries. Prior to May 2000 and November 1999, Mr. Smith was Chairman and CEO, respectively, of Marsh & McLennan Companies, Inc. ------------------------------------------------------------------------------------------------------- 1 The address of each Trustee is One Post Office Square, Boston, MA 02109. As of October 31, 2002, there were 101 Putnam Funds. 2 Each Trustee serves for an indefinite term, until his or her resignation, death, or removal. * Trustees who are or may be deemed to be "interested persons" (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc., the parent company of Putnam LLC and its affiliated companies. Messrs. Putnam, III, Lasser and Smith are deemed "interested persons" by virtue of their positions as officers or shareholders of the fund or Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc. George Putnam, III is the President of your fund and each of the other Putnam funds. Lawrence J. Lasser is the President and Chief Executive Officer of Putnam Investments and Putnam Management. Mr. Lasser and Mr. Smith serve as Directors of Marsh & McLennan Companies, Inc.
OFFICERS In addition to George Putnam III and Lawrence J. Lasser, the other officers of the fund are shown below: Name, Address, 1 Date of Birth, Length of Service with Position(s) Held with Fund the Putnam Funds Principal Occupation(s) During Past 5 Years --------------------------------------------------------------------------------------------------------------- Charles E. Porter Since 1989 Managing Director, Putnam Investments (7/26/38), Executive Vice and Putnam Management President, Treasurer and Principal Financial Officer Patricia C. Flaherty Since 1993 Senior Vice President, Putnam Investments (12/1/46), Senior Vice and Putnam Management President Karnig H. Durgarian (1/13/56), Vice President and Since 2002 Senior Managing Director, Putnam Principal Executive Officer Investments Michael T. Healy (1/24/58), Assistant Treasurer Since 2000 Managing Director, Putnam Investments and Principal Accounting Officer Steven D. Krichmar (6/27/58), Vice President and Since 2002 Managing Director, Putnam Investments. Principal Financial Officer Prior to 2001, Partner, PricewaterhouseCoopers LLP Charles E. Haldeman Jr. Since 2002 Senior Managing Director, Putnam (10/29/48), Vice President Investments and Putnam Management. Prior to 2002, Chief Executive Officer, Delaware Management Holdings, Inc.; prior to 2000, President and Chief Operating Officer, United Asset Management Stephen M. Oristaglio Since 1998 Senior Managing Director, Putnam (8/21/55), Vice President Investments and Putnam Management. Prior to 1998, Managing Director, Swiss Bank Corp. Gordon H. Silver Since 1990 Senior Managing Director, Putnam (7/3/47), Vice President Investments, Putnam Management and Putnam Retail Management Brett C. Browchuk Since 1994 Managing Director, Putnam Investments (2/27/63), Vice President and Putnam Management Richard G. Leibovitch Since 1999 Managing Director, Putnam Investments (10/31/63), Vice President and Putnam Management. Prior to 1999, Managing Director, J.P. Morgan Richard A. Monaghan Since 1998 Senior Managing Director, Putnam (8/25/54), Vice President Investments and Putnam Retail Management William J. Landes Since 2002 Managing Director, Putnam Management (1/16/53), Vice President Beth S. Mazor Since 2002 Senior Vice President, Putnam Investments (4/6/58), Vice President John R. Verani Since 1988 Senior Vice President, Putnam Investments (6/11/39), Vice President and Putnam Management Judith Cohen (6/7/45), Clerk and Since 1993 Clerk and Assistant Treasurer, The Assistant Treasurer Putnam Funds --------------------------------------------------------------------------------------------------------------- 1 The address of each Officer is One Post Office Square, Boston, MA 02109.
THE PUTNAM FAMILY OF FUNDS The following is a complete list of Putnam's open-end mutual funds. Please call your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus for any Putnam fund. It contains more complete information, including charges and expenses. Please read it carefully before you invest or send money. GROWTH FUNDS Growth Opportunities Fund Health Sciences Trust International New Opportunities Fund New Opportunities Fund OTC & Emerging Growth Fund Small Cap Growth Fund Vista Fund Voyager Fund Voyager Fund II BLEND FUNDS Capital Appreciation Fund Capital Opportunities Fund Europe Growth Fund Global Equity Fund Global Natural Resources Fund International Growth Fund International Voyager Fund Investors Fund Research Fund Tax Smart Equity Fund Utilities Growth and Income Fund VALUE FUNDS Classic Equity Fund Convertible Income-Growth Trust Equity Income Fund The George Putnam Fund of Boston The Putnam Fund for Growth and Income International Growth and Income Fund Mid Cap Value Fund New Value Fund Small Cap Value Fund * INCOME FUNDS American Government Income Fund Diversified Income Trust Global Income Trust High Yield Advantage Fund * High Yield Trust Income Fund Intermediate U.S. Government Income Fund Money Market Fund + U.S. Government Income Trust TAX-FREE INCOME FUNDS Municipal Income Fund Tax Exempt Income Fund Tax Exempt Money Market Fund + Tax-Free High Yield Fund Tax-Free Insured Fund State tax-free income funds Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio and Pennsylvania State tax-free money market funds + California, New York ASSET ALLOCATION FUNDS Putnam Asset Allocation Funds--three investment portfolios that spread your money across a variety of stocks, bonds, and money market investments. The three portfolios: Asset Allocation: Balanced Portfolio Asset Allocation: Conservative Portfolio Asset Allocation: Growth Portfolio * Closed to new investors. + An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the funds seek to preserve your investment at $1.00 per share, it is possible to lose money by investing in the fund. Check your account balances and current performance at www.putnaminvestments.com. SERVICES FOR SHAREHOLDERS HELP YOUR INVESTMENT GROW Set up a program for systematic investing with as little as $25 a month from a Putnam fund or from your own savings or checking account. (Regular investing does not guarantee a profit or protect against loss in a declining market.) SWITCH FUNDS EASILY You can move money from one Putnam fund to another within the same class of shares without a service charge. (This privilege is subject to change or termination.) ACCESS YOUR MONEY EASILY You can have checks sent regularly or redeem shares any business day at the then-current net asset value, which may be more or less than the original cost of the shares. Class B and class C shares carry a sales charge that is applied to certain withdrawals. HOW TO BUY ADDITIONAL SHARES You may buy shares through your financial advisor or directly from Putnam. To open an account by mail, send a check made payable to the name of the fund along with a completed fund application. To add to an existing account, complete the investment slip found at the top of your Confirmation of Activity statement and return it with a check payable to your fund. VISIT US AT WWW.PUTNAMINVESTMENTS.COM A secure section of our Web site contains complete information on your account, including balances and transactions, updated daily. You may also conduct transactions, such as exchanges, additional investments, and address changes. Log on today to get your password. USE OUR TOLL-FREE NUMBER 1-800-225-1581 Ask a helpful Putnam representative or your financial advisor for details about any of these or other services, or see your prospectus. FUND INFORMATION ABOUT PUTNAM INVESTMENTS One of the largest mutual fund families in the United States, Putnam Investments has a heritage of investment leadership dating back to Judge Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and practice since 1830. Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We presently manage over 100 mutual funds in growth, value, blend, fixed income, and international. INVESTMENT MANAGER Putnam Investment Management, LLC One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Retail Management One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP TRUSTEES John A. Hill, Chairman Jameson Adkins Baxter Charles B. Curtis Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam, III President Charles E. Porter Executive Vice President, Treasurer and Principal Financial Officer Patricia C. Flaherty Senior Vice President Karnig H. Durgarian Vice President and Principal Executive Officer Michael T. Healy Assistant Treasurer and Principal Accounting Officer Steven D. Krichmar Vice President and Principal Financial Officer Lawrence J. Lasser Vice President Charles E. Haldeman, Jr. Vice President Stephen M. Oristaglio Vice President Gordon H. Silver Vice President Brett C. Browchuk Vice President William J. Landes Vice President Richard G. Leibovitch Vice President Richard A. Monaghan Vice President Beth S. Mazor Vice President John R. Verani Vice President Judith Cohen Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam Utilities Growth and Income Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary and Putnam's Quarterly Ranking Summary. For more information or to request a prospectus, call toll free: 1-800-225-1581. The fund's Statement of Additional Information contains additional information about the fund's Trustees and is available without charge upon request by calling 1-800-225-1581. Visit www.putnaminvestments.com or call a representative at 1-800-225-1581. NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 --------------------- PRSRT STD U.S. POSTAGE PAID PUTNAM INVESTMENTS --------------------- For account balances, economic forecasts, and the latest on Putnam funds, visit www.putnaminvestments.com AN026-84076 840/884/869 12/02